This chapter examines the predicted economic consequences of the Big Bang reforms for a range of actors in the financial market to identify the perceived ‘winners’ and ‘losers’ from the reforms. It ...
More

This chapter examines the predicted economic consequences of the Big Bang reforms for a range of actors in the financial market to identify the perceived ‘winners’ and ‘losers’ from the reforms. It begins by providing an overview of the developments leading up to the reform initiative, focusing on the period from November 1996 through June 1997. It then summarizes the content of the initiative and the accompanying financial reforms. A discussion of expected economic consequences for the financial market in general follows.Less

Expected Economic Implications of the Big Bang

Tetsuro ToyaJennifer Amyx

Published in print: 2006-03-01

This chapter examines the predicted economic consequences of the Big Bang reforms for a range of actors in the financial market to identify the perceived ‘winners’ and ‘losers’ from the reforms. It begins by providing an overview of the developments leading up to the reform initiative, focusing on the period from November 1996 through June 1997. It then summarizes the content of the initiative and the accompanying financial reforms. A discussion of expected economic consequences for the financial market in general follows.

Andreas Busch

Political Science, International Relations and Politics, Political Economy

Does globalization erode the nation state's capacity to act? Are nation states forced to change their policies even if this goes against the democratic will of their electorates? How does government ...
More

Does globalization erode the nation state's capacity to act? Are nation states forced to change their policies even if this goes against the democratic will of their electorates? How does government action change under conditions of globalization? Questions like these have not only featured highly in political debates in recent years, but also in academic discourse. This book contributes to that debate. The general question it addresses is whether globalization leads to policy convergence — a central, but contested topic in the debate, as theoretical arguments can be advanced both in favour of and against the likelihood of such a development. More specifically, the book contains detailed empirical case studies of four countries (the United States, the United Kingdom, Germany, and Switzerland) in a policy area where state action has been particularly challenged by the emergence of world-wide, around-the-clock financial markets in the last few decades, namely that of the regulation and supervision of the banking industry. Based on careful analysis of historical developments, specific challenges, the character of policy networks and institutions, and their interaction in the political process, this book argues that nation states still possess considerable room for manoeuvre in pursuing their policies. Even if they choose supranational coordination and cooperation, their national institutional configurations still function as filters in the globalization process.Less

Banking Regulation and Globalization

Andreas Busch

Published in print: 2008-12-11

Does globalization erode the nation state's capacity to act? Are nation states forced to change their policies even if this goes against the democratic will of their electorates? How does government action change under conditions of globalization? Questions like these have not only featured highly in political debates in recent years, but also in academic discourse. This book contributes to that debate. The general question it addresses is whether globalization leads to policy convergence — a central, but contested topic in the debate, as theoretical arguments can be advanced both in favour of and against the likelihood of such a development. More specifically, the book contains detailed empirical case studies of four countries (the United States, the United Kingdom, Germany, and Switzerland) in a policy area where state action has been particularly challenged by the emergence of world-wide, around-the-clock financial markets in the last few decades, namely that of the regulation and supervision of the banking industry. Based on careful analysis of historical developments, specific challenges, the character of policy networks and institutions, and their interaction in the political process, this book argues that nation states still possess considerable room for manoeuvre in pursuing their policies. Even if they choose supranational coordination and cooperation, their national institutional configurations still function as filters in the globalization process.

The focus of this chapter is on processes—both, those that produced EMU and those that provide financial market governance in the new institutions that EMU has produced—and on the relationship ...
More

The focus of this chapter is on processes—both, those that produced EMU and those that provide financial market governance in the new institutions that EMU has produced—and on the relationship between the key concepts of Europeanization, convergence, and divergence. The substantive argument is that the creation of the Euro‐zone represents the triumph of a particular mode of financial market governance, which both, elevates the management of financial markets to the pinnacle of economic policy‐making, and insulates the development of policy from the institutions of liberal democracy. In doing so, it represents the triumph of the ‘high politics’ tendency in financial market governance and the defeat of the ‘low politics’ tendency.Less

Politics, Banks, and Financial Market Governance in the Euro‐Zone

Michael Moran

Published in print: 2002-03-07

The focus of this chapter is on processes—both, those that produced EMU and those that provide financial market governance in the new institutions that EMU has produced—and on the relationship between the key concepts of Europeanization, convergence, and divergence. The substantive argument is that the creation of the Euro‐zone represents the triumph of a particular mode of financial market governance, which both, elevates the management of financial markets to the pinnacle of economic policy‐making, and insulates the development of policy from the institutions of liberal democracy. In doing so, it represents the triumph of the ‘high politics’ tendency in financial market governance and the defeat of the ‘low politics’ tendency.

This book provides readers with reasonably concise descriptions of the state of global markets, the benefits and limitations of financial accounting and accounting/auditing standards, and the ...
More

This book provides readers with reasonably concise descriptions of the state of global markets, the benefits and limitations of financial accounting and accounting/auditing standards, and the development, status, and current policy issues of corporate financial reporting in major countries and the European Union. The globalization of financial markets has contributed to a growing consensus that national financial reporting standards should give way to a single, harmonized set of global reporting standards. This book takes a more practical approach and reaches a different conclusion: that global standards are unlikely to be achieved, and in any event, are not likely to remain unified in the face of continued changes in markets and financial practices. National accounting standards are likely to continue to be relevant for the foreseeable future, and for that reason, the book discusses the national systems and their origins in some detail. The authors also consider a range of other substantive reporting issues, notably the debate over the issue of “fair value” measurement of assets and liabilities, which the authors reject in favor of a system that marks to market only those assets with deep traded markets, coupled with additional disclosures, where relevant.Less

Worldwide Financial Reporting : The Development and Future of Accounting Standards

George J. BenstonMichael BromwichRobert E. LitanAlfred Wagenhofer

Published in print: 2006-03-17

This book provides readers with reasonably concise descriptions of the state of global markets, the benefits and limitations of financial accounting and accounting/auditing standards, and the development, status, and current policy issues of corporate financial reporting in major countries and the European Union. The globalization of financial markets has contributed to a growing consensus that national financial reporting standards should give way to a single, harmonized set of global reporting standards. This book takes a more practical approach and reaches a different conclusion: that global standards are unlikely to be achieved, and in any event, are not likely to remain unified in the face of continued changes in markets and financial practices. National accounting standards are likely to continue to be relevant for the foreseeable future, and for that reason, the book discusses the national systems and their origins in some detail. The authors also consider a range of other substantive reporting issues, notably the debate over the issue of “fair value” measurement of assets and liabilities, which the authors reject in favor of a system that marks to market only those assets with deep traded markets, coupled with additional disclosures, where relevant.

During the 20th century the City of London survived the impact of two world wars, a worldwide economic collapse, growing restrictions on international trade and finance imposed by governments, and ...
More

During the 20th century the City of London survived the impact of two world wars, a worldwide economic collapse, growing restrictions on international trade and finance imposed by governments, and the decline of Britain as an economic and imperial power. All these were major blows to its standing as a financial centre, and after 1945 it did appear that it had finally lost its dominant position in the world to New York. Meanwhile, in addition, its role in Europe was threatened by Zurich. The fact that the City was able to both reclaim its international importance, and repel European competition, was testimony to the inherent strengths it possessed at the beginning of the century, its ability to transform itself in response to opportunities and challenges, and the failure of alternative centres to capitalize on London's weaknesses and so replace it.Less

A Financial Phoenix: The City of London in the Twentieth Century

Ranald Michie

Published in print: 2005-01-20

During the 20th century the City of London survived the impact of two world wars, a worldwide economic collapse, growing restrictions on international trade and finance imposed by governments, and the decline of Britain as an economic and imperial power. All these were major blows to its standing as a financial centre, and after 1945 it did appear that it had finally lost its dominant position in the world to New York. Meanwhile, in addition, its role in Europe was threatened by Zurich. The fact that the City was able to both reclaim its international importance, and repel European competition, was testimony to the inherent strengths it possessed at the beginning of the century, its ability to transform itself in response to opportunities and challenges, and the failure of alternative centres to capitalize on London's weaknesses and so replace it.

Potential conflicts of interest are a fact of life among the financial firms that help direct the flow of capital in the modern market-oriented economy. There are essentially two types of conflicts ...
More

Potential conflicts of interest are a fact of life among the financial firms that help direct the flow of capital in the modern market-oriented economy. There are essentially two types of conflicts of interest that face intermediary firms: Type 1 conflicts arise between a firm’s own economic interests and the interests of its clients, usually reflected in the misappropriation of economic gains or mispriced transfers of risk; Type 2 conflicts develop between clients, placing the firm in a position of favoring one at the expense of another-bankers who systematically favor corporate clients over investing clients would be an example of this type of conflict. Both types of conflicts can arise either from interprofessional transactions carried out in wholesale financial markets, or in activities involving retail clients.Less

Conflicts of Interest

Roy C. SmithIngo Walter

Published in print: 2006-02-23

Potential conflicts of interest are a fact of life among the financial firms that help direct the flow of capital in the modern market-oriented economy. There are essentially two types of conflicts of interest that face intermediary firms: Type 1 conflicts arise between a firm’s own economic interests and the interests of its clients, usually reflected in the misappropriation of economic gains or mispriced transfers of risk; Type 2 conflicts develop between clients, placing the firm in a position of favoring one at the expense of another-bankers who systematically favor corporate clients over investing clients would be an example of this type of conflict. Both types of conflicts can arise either from interprofessional transactions carried out in wholesale financial markets, or in activities involving retail clients.

This chapter adds to the ‘varieties of capitalism’ literature by demonstrating that economic practices of countries are not converging on a one‐size‐fits‐all neo‐liberal model of capitalism, despite ...
More

This chapter adds to the ‘varieties of capitalism’ literature by demonstrating that economic practices of countries are not converging on a one‐size‐fits‐all neo‐liberal model of capitalism, despite the fact that all have become more market‐oriented. Instead, they continue to be differentiable into not just two varieties of capitalism, conforming to liberal or coordinated market economies, but three, along lines of development from the original three postwar models of capitalism. The chapter contrasts the three varieties of capitalism in terms of interfirm relations, business‐government relations, and management‐labour relations; outlines the differential national pathways of adjustment of the countries conforming to the three varieties; highlights their continuing differences using indicators related to the financial markets and production systems; and considers their comparative advantages and disadvantages. It concludes that while British market capitalism has gone farther in its traditional market‐oriented direction, German managed capitalism is under strain, while French state capitalism has been transformed but has become neither market nor managed capitalist.Less

Still Three Models of Capitalism? The Impact of Changing Policies and Growing Pressures on Economic Practices

Vivien A. Schmidt

Published in print: 2002-08-15

This chapter adds to the ‘varieties of capitalism’ literature by demonstrating that economic practices of countries are not converging on a one‐size‐fits‐all neo‐liberal model of capitalism, despite the fact that all have become more market‐oriented. Instead, they continue to be differentiable into not just two varieties of capitalism, conforming to liberal or coordinated market economies, but three, along lines of development from the original three postwar models of capitalism. The chapter contrasts the three varieties of capitalism in terms of interfirm relations, business‐government relations, and management‐labour relations; outlines the differential national pathways of adjustment of the countries conforming to the three varieties; highlights their continuing differences using indicators related to the financial markets and production systems; and considers their comparative advantages and disadvantages. It concludes that while British market capitalism has gone farther in its traditional market‐oriented direction, German managed capitalism is under strain, while French state capitalism has been transformed but has become neither market nor managed capitalist.

This chapter analyzes the sources, magnitude, and means of financing investments in public and private enterprises after the Korean War. The analysis considers the credit policies relative to ...
More

This chapter analyzes the sources, magnitude, and means of financing investments in public and private enterprises after the Korean War. The analysis considers the credit policies relative to economic sectors (e.g., industry, mining, trade, and agriculture); industrial sectors (e.g., social overhead capital and manufacturing); the nature of investment (e.g., “entrepreneurial”, capital-, and technological-intensities in industries, the scale of business), and loan terms. This chapter also evaluates the criteria used to allocate loans, as well as the sources of financial resources obtained by the domestic lending institutions. The government interest rate policy is also examined.Less

Domestic Financing of Business and Public Investments

Young‐Iob Chung

Published in print: 2007-08-01

This chapter analyzes the sources, magnitude, and means of financing investments in public and private enterprises after the Korean War. The analysis considers the credit policies relative to economic sectors (e.g., industry, mining, trade, and agriculture); industrial sectors (e.g., social overhead capital and manufacturing); the nature of investment (e.g., “entrepreneurial”, capital-, and technological-intensities in industries, the scale of business), and loan terms. This chapter also evaluates the criteria used to allocate loans, as well as the sources of financial resources obtained by the domestic lending institutions. The government interest rate policy is also examined.

This chapter examines the fundamental effects related to the evolving dominance of capital markets. By the end of the 20th century, the proportion of all financial assets held by banks had declined ...
More

This chapter examines the fundamental effects related to the evolving dominance of capital markets. By the end of the 20th century, the proportion of all financial assets held by banks had declined to approximately 30% from 45% in 1980, with the difference transferred to global financial markets that had developed to an extraordinary, completely unprecedented size with market capitalization of stocks and bonds exceeding $72 trillion in 2000. These markets contained powerful forces that could quickly move funds in large quantities around the world to jump into (or out of) a suddenly discovered investment opportunity. These forces were energized by enormous turnover volumes — the value of consolidated world stock trading in 2000 was more than $47 trillion, one and a half times its market capitalization. About half of this trading occurred outside the United States, in stock markets in Europe, Asia, and Latin America.Less

The New Financial Markets

Roy C. SmithIngo Walter

Published in print: 2006-02-23

This chapter examines the fundamental effects related to the evolving dominance of capital markets. By the end of the 20th century, the proportion of all financial assets held by banks had declined to approximately 30% from 45% in 1980, with the difference transferred to global financial markets that had developed to an extraordinary, completely unprecedented size with market capitalization of stocks and bonds exceeding $72 trillion in 2000. These markets contained powerful forces that could quickly move funds in large quantities around the world to jump into (or out of) a suddenly discovered investment opportunity. These forces were energized by enormous turnover volumes — the value of consolidated world stock trading in 2000 was more than $47 trillion, one and a half times its market capitalization. About half of this trading occurred outside the United States, in stock markets in Europe, Asia, and Latin America.

Trends over the last half century in particular have shown that Paris has been able to exist as a financial centre only when its financial market has been vigorous, which has clearly been a necessary ...
More

Trends over the last half century in particular have shown that Paris has been able to exist as a financial centre only when its financial market has been vigorous, which has clearly been a necessary but not always a sufficient condition. The future of the Paris market can be seen in terms of its ability to play a leading role in continental Europe. But this will only be possible through alliances with other markets.Less

The Future of the Paris Market as an International Financial Centre from the Point of View of European Integration

André Straus

Published in print: 2005-01-20

Trends over the last half century in particular have shown that Paris has been able to exist as a financial centre only when its financial market has been vigorous, which has clearly been a necessary but not always a sufficient condition. The future of the Paris market can be seen in terms of its ability to play a leading role in continental Europe. But this will only be possible through alliances with other markets.

This chapter discusses how economic rent was created and distributed in the course of economic development in Korea, focusing on government intervention in the financial market. The Korean experience ...
More

This chapter discusses how economic rent was created and distributed in the course of economic development in Korea, focusing on government intervention in the financial market. The Korean experience shows that it is possible for governments to intervene productively and effectively in the early stages of economic development. The balance between the role of government and market forces should reflect the financial market, industrial organization, market structure, and political and international environment facing the country. However, as economic development advances, the role and scope of government intervention must be reappraised with a view towards greater reliance on market forces.Less

Government Intervention, Rent Distribution, and Economic Development in Korea

Yoon Je Cho

Published in print: 1998-08-06

This chapter discusses how economic rent was created and distributed in the course of economic development in Korea, focusing on government intervention in the financial market. The Korean experience shows that it is possible for governments to intervene productively and effectively in the early stages of economic development. The balance between the role of government and market forces should reflect the financial market, industrial organization, market structure, and political and international environment facing the country. However, as economic development advances, the role and scope of government intervention must be reappraised with a view towards greater reliance on market forces.

This chapter analyses policy responses to the instability of the international monetary system during the 1970s and how these policies affected the City of London. First, the collapse of the ...
More

This chapter analyses policy responses to the instability of the international monetary system during the 1970s and how these policies affected the City of London. First, the collapse of the international monetary system through the 1960s and then the increased risk to the financial market in the 1970s accelerated the pace of financial innovation. Second, as currency speculation grew, policymakers were reluctant to relax controls on the flow of capital, and this had important implications for London's competitiveness. The debate between the state, academics, and bankers over the desirability of floating exchange rates is surveyed in this chapter. The era of floating exchange rates and inflation prompted an international and domestic banking crisis in 1974 that drew the Bank of England into more active attempts at prudential supervision.Less

Crisis and Opportunity: The Policy Environment of International Banking in the City of London, 1958–1980

Catherine Schenk

Published in print: 2005-01-20

This chapter analyses policy responses to the instability of the international monetary system during the 1970s and how these policies affected the City of London. First, the collapse of the international monetary system through the 1960s and then the increased risk to the financial market in the 1970s accelerated the pace of financial innovation. Second, as currency speculation grew, policymakers were reluctant to relax controls on the flow of capital, and this had important implications for London's competitiveness. The debate between the state, academics, and bankers over the desirability of floating exchange rates is surveyed in this chapter. The era of floating exchange rates and inflation prompted an international and domestic banking crisis in 1974 that drew the Bank of England into more active attempts at prudential supervision.

This chapter examines the ability of the Paris Bourse from the 1950s onwards to maintain a marginal but nevertheless persistent level, the return of the franc to external convertibility, and ...
More

This chapter examines the ability of the Paris Bourse from the 1950s onwards to maintain a marginal but nevertheless persistent level, the return of the franc to external convertibility, and liberalization of the financial market in the second half of the 1980s. By considering the ebb and flow of the dynamics of the international markets in their effect on capital markets, it is possible to throw some light on the changes within the whole of the French financial system.Less

The International Opening-up the Paris Bourse: Overdraft-Economy Curbs and Market Dynamics

Olivier Feiertag

Published in print: 2005-01-20

This chapter examines the ability of the Paris Bourse from the 1950s onwards to maintain a marginal but nevertheless persistent level, the return of the franc to external convertibility, and liberalization of the financial market in the second half of the 1980s. By considering the ebb and flow of the dynamics of the international markets in their effect on capital markets, it is possible to throw some light on the changes within the whole of the French financial system.

This chapter focuses on what would seem at first glance to be the most problematic issue area today in the context of the current financial crisis and recession, what has been called ...
More

This chapter focuses on what would seem at first glance to be the most problematic issue area today in the context of the current financial crisis and recession, what has been called “financialization.” The increasingly tight coupling of global financial markets, new forms of financial innovation, the politics of economic growth, and the process of economic development have led to a politics of regulatory change over the past three decades that was long believed to be stable but has proven deeply fragile. The process of so-called financial deregulation was not only promoted by self-interested capitalists, although they were key players, but also by actors in the real economy seeking new forms of investment, regulators and bureaucrats at home and in transgovernmental networks, a wide range of interest and even value groups, political parties and leaders on both right and left, neoliberal intellectuals of various stripes — not just economists — and, of course, voters and consumers. For example, people wanting to own their own homes but lacking the resources to do so were an essential part of the complex set of causes of the so-called subprime mortgage crisis in the United States, which started the process of unraveling.Less

Financial Globalization, Crisis, and the Reorganization of Global Capital

Philip G. Cerny

Published in print: 2010-02-24

This chapter focuses on what would seem at first glance to be the most problematic issue area today in the context of the current financial crisis and recession, what has been called “financialization.” The increasingly tight coupling of global financial markets, new forms of financial innovation, the politics of economic growth, and the process of economic development have led to a politics of regulatory change over the past three decades that was long believed to be stable but has proven deeply fragile. The process of so-called financial deregulation was not only promoted by self-interested capitalists, although they were key players, but also by actors in the real economy seeking new forms of investment, regulators and bureaucrats at home and in transgovernmental networks, a wide range of interest and even value groups, political parties and leaders on both right and left, neoliberal intellectuals of various stripes — not just economists — and, of course, voters and consumers. For example, people wanting to own their own homes but lacking the resources to do so were an essential part of the complex set of causes of the so-called subprime mortgage crisis in the United States, which started the process of unraveling.

This chapter assesses the evolution of international standard setting in financial markets by examining the characteristics of the various international bodies, such as the Basel Committee on Banking ...
More

This chapter assesses the evolution of international standard setting in financial markets by examining the characteristics of the various international bodies, such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, that are involved in international standard setting. Topics discussed include international financial institutions, supervisory structures for financial conglomerates, the Financial Action Task Force, and financial crises from the 1990s and onwards.Less

Global Governance and International Standard Setting

Kern AlexanderRahul DhumaleJohn Eatwell

Published in print: 2005-09-29

This chapter assesses the evolution of international standard setting in financial markets by examining the characteristics of the various international bodies, such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, that are involved in international standard setting. Topics discussed include international financial institutions, supervisory structures for financial conglomerates, the Financial Action Task Force, and financial crises from the 1990s and onwards.

This chapter examines the nature, effects, and consequences of the bubble of 1995-2000. The 20th century experienced four exceptional stock market booms in the United States that have been called ...
More

This chapter examines the nature, effects, and consequences of the bubble of 1995-2000. The 20th century experienced four exceptional stock market booms in the United States that have been called “bubbles”. Economist Richard Sylla describes these periods (1905, 1928, 1958, 1998) as times when the 10-year moving averages of real rates of return on stocks reached peaks from which they rapidly descended (or crashed) a year to two later. Of these four bubbles, the ones that peaked in 1928 and 1998, leading to crashes in 1929 and 2000, respectively, were the ones of greatest significance. The 2000 crash involved more financial wreckage than earlier crashes. It was followed by scandals that were front-page stories for months, and public interest in the market collapse and its causes and consequences was intense. The causes of the 2000-2002 crash are analyzed.Less

Irrational Exuberance

Roy C. SmithIngo Walter

Published in print: 2006-02-23

This chapter examines the nature, effects, and consequences of the bubble of 1995-2000. The 20th century experienced four exceptional stock market booms in the United States that have been called “bubbles”. Economist Richard Sylla describes these periods (1905, 1928, 1958, 1998) as times when the 10-year moving averages of real rates of return on stocks reached peaks from which they rapidly descended (or crashed) a year to two later. Of these four bubbles, the ones that peaked in 1928 and 1998, leading to crashes in 1929 and 2000, respectively, were the ones of greatest significance. The 2000 crash involved more financial wreckage than earlier crashes. It was followed by scandals that were front-page stories for months, and public interest in the market collapse and its causes and consequences was intense. The causes of the 2000-2002 crash are analyzed.

Mark Fenton-O'Creevy, Nigel Nicholson, Emma Soane, and Paul Willman

Business and Management, Finance, Accounting, and Banking, Organization Studies

This is a book about traders in financial markets: what they do, the kind of people they are, how they perceive the world they inhabit, how they make decisions and take risks. This is also a book ...
More

This is a book about traders in financial markets: what they do, the kind of people they are, how they perceive the world they inhabit, how they make decisions and take risks. This is also a book about how traders are managed — the best and the worst examples — and about the institutions they inhabit: firms, markets, cultures, and theories of how the world works. How these institutions function, how traders are managed, and how traders view the world, all have profound effects on the wider financial environment. This book explores these relationships and their implications theoretically and empirically. The data discussed in this book draw on a three-year project researching the psychological and social influences on the behaviour and performance of traders in investment banks. 118 traders and managers in four leading organizations participated. Data were collected through semi-structured interviews supplemented by questionnaires, measures of personality, risk propensity and a novel computer based measure designed to assess illusion of control and other cognitive biases. The book draws on sociology, psychology, and economics in order to illuminate the work of traders and the world they inhabit.Less

Traders : Risks, Decisions, and Management in Financial Markets

Mark Fenton-O'CreevyNigel NicholsonEmma SoanePaul Willman

Published in print: 2004-09-16

This is a book about traders in financial markets: what they do, the kind of people they are, how they perceive the world they inhabit, how they make decisions and take risks. This is also a book about how traders are managed — the best and the worst examples — and about the institutions they inhabit: firms, markets, cultures, and theories of how the world works. How these institutions function, how traders are managed, and how traders view the world, all have profound effects on the wider financial environment. This book explores these relationships and their implications theoretically and empirically. The data discussed in this book draw on a three-year project researching the psychological and social influences on the behaviour and performance of traders in investment banks. 118 traders and managers in four leading organizations participated. Data were collected through semi-structured interviews supplemented by questionnaires, measures of personality, risk propensity and a novel computer based measure designed to assess illusion of control and other cognitive biases. The book draws on sociology, psychology, and economics in order to illuminate the work of traders and the world they inhabit.

This chapter discusses advances in formal economic theory by examining how different positions among economists arise from their different assumptions and models. The discussion focuses on ways in ...
More

This chapter discusses advances in formal economic theory by examining how different positions among economists arise from their different assumptions and models. The discussion focuses on ways in which real world economies differ from the ‘competitive equilibrium’ model that has become the benchmark model. The current benchmark competitive equilibrium framework includes new classical, representative agent, and real business cycle models which assume that all markets (including the labor market) have clear, perfect information, complete markets (including perfect capital and insurance markets), perfect wage and price flexibility, perfect competition, perfect rationality, and no externalities. If these models accurately portrayed reality, the economy would be efficient and there would be no need for government intervention. The assumptions of these models, however, are unrealistic and it is difficult to reconcile the required macro-formulations with what is known about microeconomic behavior (without resorting to ad hoc assumptions about the nature of the stochastic shocks to preferences and technology). The inadequacies of these models are even greater for developing countries where information imperfections are more pervasive and more markets are missing or incomplete (e.g., insurance markets). Accordingly, economic research since the 1990s has focused on identifying the most important limitations of the standard competitive model, particularly those limitations that help to explain the nature of economic volatility.Less

Formal Approaches

Published in print: 2006-08-31

This chapter discusses advances in formal economic theory by examining how different positions among economists arise from their different assumptions and models. The discussion focuses on ways in which real world economies differ from the ‘competitive equilibrium’ model that has become the benchmark model. The current benchmark competitive equilibrium framework includes new classical, representative agent, and real business cycle models which assume that all markets (including the labor market) have clear, perfect information, complete markets (including perfect capital and insurance markets), perfect wage and price flexibility, perfect competition, perfect rationality, and no externalities. If these models accurately portrayed reality, the economy would be efficient and there would be no need for government intervention. The assumptions of these models, however, are unrealistic and it is difficult to reconcile the required macro-formulations with what is known about microeconomic behavior (without resorting to ad hoc assumptions about the nature of the stochastic shocks to preferences and technology). The inadequacies of these models are even greater for developing countries where information imperfections are more pervasive and more markets are missing or incomplete (e.g., insurance markets). Accordingly, economic research since the 1990s has focused on identifying the most important limitations of the standard competitive model, particularly those limitations that help to explain the nature of economic volatility.

This book describes an approach, alternative to the theory of efficient markets, to the study of financial markets: behavioural finance. It begins by assessing the efficient market hypothesis, ...
More

This book describes an approach, alternative to the theory of efficient markets, to the study of financial markets: behavioural finance. It begins by assessing the efficient market hypothesis, emphasising how some of its foundations are contradicted by psychological and institutional evidence. It then introduces the theory of behavioural finance and devotes the rest of the book to explore its main aspects, concentrating on the role and characteristics of noise traders, arbitrageurs, and investors. Chapters 2 through 4 focus on the limits imposed on arbitrage by factors such as risk aversion or agency problems. Two crucial conclusions are reached. First, plausible theories of arbitrage do not lead to the prediction that markets are efficient—quite the opposite. Second, the recognition that arbitrage is limited, even without specific assumptions about investor sentiment, generates new empirically testable predictions, some of which have been confirmed in the data. Chapters 5 and 6 centre on how investor sentiments are built, emphasising some empirical violations to the idea of efficient markets such as price bubbles. The book concludes suggesting that the theory of behavioural finance is indeed more effective that the efficient market theory in explaining some financial evidence.Less

Inefficient Markets : An Introduction to Behavioral Finance

Andrei Shleifer

Published in print: 2000-03-09

This book describes an approach, alternative to the theory of efficient markets, to the study of financial markets: behavioural finance. It begins by assessing the efficient market hypothesis, emphasising how some of its foundations are contradicted by psychological and institutional evidence. It then introduces the theory of behavioural finance and devotes the rest of the book to explore its main aspects, concentrating on the role and characteristics of noise traders, arbitrageurs, and investors. Chapters 2 through 4 focus on the limits imposed on arbitrage by factors such as risk aversion or agency problems. Two crucial conclusions are reached. First, plausible theories of arbitrage do not lead to the prediction that markets are efficient—quite the opposite. Second, the recognition that arbitrage is limited, even without specific assumptions about investor sentiment, generates new empirically testable predictions, some of which have been confirmed in the data. Chapters 5 and 6 centre on how investor sentiments are built, emphasising some empirical violations to the idea of efficient markets such as price bubbles. The book concludes suggesting that the theory of behavioural finance is indeed more effective that the efficient market theory in explaining some financial evidence.

While globalization has been a major economic, institutional, and ideational force for change, Europeanization has been an even more significant force for European Union member‐states, both as a ...
More

While globalization has been a major economic, institutional, and ideational force for change, Europeanization has been an even more significant force for European Union member‐states, both as a conduit for global forces and as a shield against them. But however much sovereignty has been undermined by globalization and Europeanization, the resulting losses in national autonomy and control are largely offset by gains in shared supranational authority and control. This chapter considers the changing relations of power and influence between national and supranational authorities as it examines the debates on globalization with regard to the internationalization of financial markets and trade, the ‘statelessness’ of multinationals, and their spillover effects on the welfare state. It then contrasts the impact of globalization with the greater impact of Europeanization on European member‐states while discussing European monetary and market integration and their effects on the welfare state.Less

The Challenges of Globalization and Europeanization: The Impact on National Autonomy and Control

Vivien A. Schmidt

Published in print: 2002-08-15

While globalization has been a major economic, institutional, and ideational force for change, Europeanization has been an even more significant force for European Union member‐states, both as a conduit for global forces and as a shield against them. But however much sovereignty has been undermined by globalization and Europeanization, the resulting losses in national autonomy and control are largely offset by gains in shared supranational authority and control. This chapter considers the changing relations of power and influence between national and supranational authorities as it examines the debates on globalization with regard to the internationalization of financial markets and trade, the ‘statelessness’ of multinationals, and their spillover effects on the welfare state. It then contrasts the impact of globalization with the greater impact of Europeanization on European member‐states while discussing European monetary and market integration and their effects on the welfare state.